New home prices posted their biggest drop in 37 years in October, according to a government report.

NEW YORK (CNNMoney.com) -- The biggest plunge in new home prices in 37 years was not enough to revive October sales, according to the government's latest reading on the battered housing and home building markets.

The sales pace for October was well short of economists' forecasts. The Census Bureau's latest report also sharply cut back on its earlier estimates for sales in August and September, when a meltdown in mortgage markets kept many potential buyers from getting the financing they needed.

Also depressing sales and prices was a record 191,000 completed new homes on the market that have not yet been sold.

The report showed that the median price of a new home sold in October plunged 13 percent from year-earlier levels to $217,800. It was the most severe year-over-year drop since September 1970, when the median price was only $22,600, or less than the cost of a typical new car purchase today.

And the price figure may actually be underestimating how the bottom has fallen out of prices in recent months. Most builders are trying to support prices by offering to cover closing costs or by adding free features on new homes.

"We've gone beyond the stage where some of those incentives can work," said Mike Larson, a real estate analyst with Weiss Research, an independent research firm. "We're into the stage that home builders have to cut prices to move inventory."

Larson said he's encouraged that builders have cut back on new homes in the pipeline, which allowed for the overall inventory of new homes for sale to decline slightly, even as the number of completed homes for sale edged up.

"We're still oversupplied but a little less so," he said.

The annual pace of sales of new homes came in at 728,000 for the month. That actually edged upfrom the revised 716,000 rate for September, but it's well below the original reading of 770,000 for that month. The new September sales rate represents an 11-year low, and the August reading was also revised lower to 717,000.

Economists surveyed by Briefing.com had been expecting a sales rate of 750,000 in October. The current sales pace is only a little more than half the demand seen as recently as two years ago, during the summer of 2005, when the housing and home building markets were both at record highs.

Thursday's report is only the latest sign of weakness in the housing market. On Wednesday, a separate report by the National Association of Realtors reported the weakest sales of existing homes on record, despite the largest drop in prices ever.

While existing homes make up a majority of sales, the new homes report is closely watched as a better leading indicator of market strength, since those sales are recorded when a sales contract is signed. Existing home sales figures are collected at the time the sales close, typically a month or two after the sales contract is signed.

The weak housing market has hit home builders particularly hard.

Of the nation's largest home builders, only luxury home builder Toll Brothers (Charts, Fortune 500), No. 6 in terms of revenue, has yet to report a quarterly loss in the current downturn. Analysts are forecasting a loss for Toll's just completed period after preliminary results showed a sharp drop in the number of homes sold and an even steeper decline in prices.

The five builders larger than Toll all reported much larger-than-forecast losses in recent financial periods. Earlier this month Hovnanian Enterprises (Charts, Fortune 500), the nation's No. 7 builder by revenue, reported that the sales pace during October "significantly deteriorated" in most of its markets, and its preliminary results also showed a sharp rise in cancellations. D.R. Horton (Charts, Fortune 500), the No. 3 builder, reported a smaller-than-expected loss last week, but that followed a quarter with a much larger-than-forecasted loss.

In October, credit rating agency Moody's downgraded the debt of No. 1 home builder Lennar (Charts, Fortune 500), No. 2 Centex (Charts, Fortune 500) and No. 4 Pulte Homes (Charts, Fortune 500) to junk bond status. Shares of most of the major builders were lower in trading midday Thursday. The exceptions were Pulte, which was higher, and Centex, which was little changed.